Tom Essaye Quoted in Seeking Alpha on June 12, 2019

Tom Essaye quoted in Seeking Alpha. Analysts are also starting to reassess the June market comeback, with some saying it doesn’t quite make sense. “This rally is not fundamentally backed. Instead what we are seeing is a…” Click here to read the full article.

Tom Essaye Headshot

Market Scenario Update (Good/Bad/Ugly)

What’s in Today’s Report:

  • How Good Was Last Week? (Good/Bad/Ugly Scenario Update)

It is a risk-on morning with U.S. stock futures tracking international equity markets higher after China announced a new wave of stimulus measures overnight.

The PBOC explained that the program would support infrastructure investment through special bond issuance which helped mainland China shares rally 2.6% on the session.

Economically, the NFIB Small Business Optimism Index was 105.0 vs. (E) 102.0. in May despite the elevated trade tensions, which helped S&P futures extend pre-market gains during the last hour.

Today, the calendar is relatively quiet although there is one inflation figure due out ahead of the open: PPI (E: 0.1%) and even though it is a lesser followed report, a “hot” print could still cause an uptick in volatility after the melt up we have seen over the last week.

There are no Fed officials scheduled to speak today which will leave investors looking for any further updates on the trade war, but even though the market is near-term overbought, no news is good news as sentiment is very positive and momentum alone could help stocks continue higher today.

Bull Steepening (Not Necessarily Good for Stocks)

What’s in Today’s Report:

  • The Yield Curve Is Steepening, That’s Good for Stocks Right? (Not Necessarily)

Futures are moving higher on dovish optimism following soft economic data overseas ahead of today’s jobs report but trade war developments were actually negative overnight.

German data disappointed overnight as Industrial Production fell -1.9% vs. (E) -0.5% while the trade surplus narrowed to 17.0B euros, a 9-month low.

The data is fueling hopes of a dovish policy shift from the ECB, however, after Draghi cited soft manufacturing trends as a concern earlier in the week which is helping EU shares outperform this morning.

Trade news was a net negative overnight as Mexican tariffs are still expected to be implemented on Monday (hopes of a delay pushed stocks higher yesterday afternoon) while there were no material developments on the China front.

Today, investors will be primarily focused on the Employment Situation Report due out at 8:30 a.m. ET (E: +180K job adds, 3.7% UR, 3.2% wage growth YoY).

Due to the huge dovish shift in Fed policy expectations over the last week, bad news will be good news for stocks as the odds of a summer rate cut will rise and the biggest risk for stocks is a “hot” print this morning, especially on wages.

Is the “Fed Put” Back?

What’s in Today’s Report:

  • Is the “Fed Put” Back?

Futures are higher as Tuesday’s “squeezy” rally carried over into international markets overnight thanks to the dovish Fed rhetoric over the last 24 hours and a handful of incremental positive macro developments.

Mnuchin will meet with Chinese officials this weekend and there is growing support by Republican Senators to block Mexican tariffs, both of which are trade war positives.

Economic data overnight was mixed but “goldilocks” as EU composite PMIs were largely better than feared, Eurozone Retail Sales were in line with expectations, while inflation statistics came in light.

Today, focus will be on economic data early with the ADP Employment Report (E: 175K) due out ahead of the bell while the ISM Non-Manufacturing Index (E: 55.8) will print shortly after the open.

There is also one Fed speaker: Bostic (9:45 a.m. ET) and if the general tone remains dovish, this week’s short-squeeze in stocks can continue with the S&P approaching the 2850 area.

However, because the macro backdrop has not materially improved so far this week (again the developments have just been “less bad”), it is unlikely at this point that the move is the beginning of a sustainable, longer term rally.

Good, Bad, & Ugly Market Scenarios

What’s in Today’s Report:

  • Good/Bad/Ugly Scenarios: Likely Market Reactions (Print this Table)

Stock futures are bouncing modestly as investor sentiment improved o/n amid reported progress on one front of the trade war while the markets await Fed comments today.

There were two positive headlines on U.S.-Mexico trade overnight.

First, Republicans in Congress are working to block Trump’s tariff plans and second, the Mexican government has already stepped up border security, showing cooperation on the main demands from the White House.

Meanwhile the RBA cut rates as expected, but the move is adding to the dovish tailwind that has helped markets stabilize so far this week.

Today, there are a few data points to watch: Motor Vehicle Sales (E: 16.9M) and Factory Orders (E: -0.8%), but the markets main focus will be on the Fed as there are several speakers: Williams (8:30 a.m. ET), Powell (9:55 a.m. ET), Brainard (3:45 p.m. ET).

Powell will clearly be the most closely watched, however any further hints at a potential rate cut in the near term will be received positively by the market. Conversely if Bullard’s dovish comments from yesterday are contradicted, stocks could easily turn back negative on the week.

The Four Problems Facing Stocks (Print This List)

Today’s Report is attached as a PDF.

What’s in Today’s Report:

  • Market Strategy Update:  The Four Problems Facing Stocks And Positive/Negative Outcomes for Each (I’m printing this list).
  • Weekly Market Preview (It’s Going to Be a Busy Week)
  • Weekly Economic Cheat Sheet

Futures are marginally lower following a busy weekend of news, but one that provided no significant surprises.

Global May manufacturing PMIs were mixed but a bit better than feared.  Chinese Manufacturing PMI was 50.2 vs. (E) 50.0, while the EU PMI met estimates at 47.7.  The British PMI was the disappointment at 49.4 vs. (E) 52.0.

On trade, a Mexican delegation is headed to Washington on Wednesday and there were some relatively positive comments from China, but neither situation has improved.

Today the key event will be the May ISM Manufacturing PMI (E: 52.9).  If that number meets expectations, that will alleviate some growth concerns, while a miss will only worsen the growing worries that the economy is rolling over.  From a Fed standpoint, there are two speakers today (Bullard 1:25 p.m. ET, Daly 9:45 p.m. ET) but neither should move markets as they aren’t part of Fed leadership.

What Mexican Tariffs Mean for Markets

What’s in Today’s Report:

  • What Mexican Tariffs Mean for Markets (New Worst Case Scenario)
  • Two Leading Indicators of Market Contagion We’re Watching
  • Fed Policy Update
  • EIA/Oil Outlook

Futures are down 1% as President Trump announced tariffs against Mexican imports in response to the border crisis, while Chinese economic data missed expectations.

Trump announced a 5% tariff on Mexican imports in June  and rising each month there after until they hit 25%.

The March Chinese manufacturing PMI missed estimates at 49.4 vs. (E) 49.9 adding to global growth worries.

Today the key number is the Core PCE Price Index (E: 1.6% yoy) and if that number prints stronger than estimates, expectations for a Fed rate cut will drop further and given everything else happening today, markets could get ugly.  Conversely, a soft inflation number will increase calls for a rate cut, and stocks could steady on that news.

The other key event today is a speech by New York Fed President Williams, and markets will want to see if he has a dovish tone following the tariff announcement and recent soft data (if he does, that’s a positive).

Technical Update (Important Levels to Watch)

What’s in Today’s Report:

  • Market Technical Update – Important Support and Resistance Levels To Watch
  • Have Stocks Fallen Too Far Too Fast?

Futures are enjoying a modest oversold bounce following a quiet night of news.

There was no new trade news or notable economic data overnight.

Sentiment has turned negative very quickly this week, despite the lack of any incremental bad news (so far) and this morning we’re seeing stocks attempt to bounce.

There are multiple economic reports today including (in order of importance):  Revised Q1 GDP (E: 3.0%), Jobless Claims (E: 215K), Pending Home Sales Index (E: 0.5%) and International Trade in Goods (E: -$71.9B).

But, the most important event of the day will be a speech by Fed Vice Chair Clarida at 12:00 p.m. ET, and the key here will be whether he sounds more open to a preventative rate cut, or whether he reaffirms the Fed’s “transitory” view of low inflation.  The former will be positive for stocks, the later will be negative.

Why Downside Risks Are Building in Stocks

What’s in Today’s Report:

  • Why Downside Risks Are Building in Stocks
  • Weekly Market Preview
  • Weekly Economic Cheat Sheet (Friday is an important day)

Futures are modestly lower following a generally quiet three day weekend, as investors digest last week’s deterioration in economic data and U.S.-China trade relations.

Economic data was sparse overnight and the only notable report was German GfK Consumer Climate, which slightly missed expectations (10.1 vs. (E ) 10.4).  There was no material economic data out Monday.

On trade, Trump’s trip to Japan was a general non-event and there were no new developments (positive or negative) on U.S.-China trade.

Today we have a few housing numbers including Cash-Shiller HPI (E: 2.5% y/y) and FHFA HPI (E: 0.3% m/m) as well as Consumer Confidence (E: 129.8), but none of those should move markets materially.

Instead, focus will be on the news wires for any updates on U.S. – China trade and on support in the S&P 500 at 2800, which is becoming an increasingly important level.

The Bond Market Is Screaming For a Rate Cut

What’s in Today’s Report:

  • Why The Bond Market Is Screaming For a Rate Cut

Futures are bouncing modestly following some hopeful comments by President Trump on U.S.-China trade.

Late yesterday President Trump made comments expressing optimism about an eventual U.S.-China trade deal that includes a solution for Huawei.  No specifics or new details were provided, however.

Brexit entered a new phase as PM May announced she will resign on June 7th.  But, until a “No Deal” becomes more likely, the global markets will continue ignore Brexit.

Today focus will be on Durable Goods Orders (E: -2.0%) and support at 2800 in the S&P 500.  Yesterday that support level held and that’s a key number to watch going forward, as a violation of 2800 could open up an “air pocket” in stocks.

Regarding Durable Goods, it’d be nice if the data was solid, but it’s an April number so it won’t reflect activity following the flare up of U.S.-China trade tensions, and the headline is likely to be negatively skewed by cancellations for the 737, which started last month.